10-Q 1 0001.txt Form 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 29, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-14035 Stage Stores, Inc. (Exact name of registrant as specified in its charter) DELAWARE 76-0407711 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identifications No.) 10201 Main Street, Houston, 77025 Texas (Zip Code) (Address of principal executive offices) (713) 667-5601 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __ No _X_ The number of shares of common stock of Stage Stores, Inc. outstanding as of July 14, 2000 was 26,850,223 shares of Common Stock and 1,250,584 shares of Class B Common Stock. Part I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Stage Stores, Inc. Consolidated Condensed Balance Sheet (in thousands, except par values) (unaudited) April 29, 2000 January 29, 2000 ASSETS Cash and cash equivalents $21,064 $20,179 Undivided interest in accounts receivable trust 35,527 41,600 Merchandise inventories, net 261,332 261,104 Prepaid expenses and other current assets 37,392 34,191 Total current assets 355,315 357,074 Property, equipment and leasehold improvements, net 164,739 181,834 Other assets 15,691 15,779 Total assets $535,745 $554,687 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $63,963 $40,955 Accrued expenses and other current liabilities 68,676 72,177 Current portion of long-term debt 4,841 9,830 Long-term debt classified as current 487,520 492,393 Total current liabilities 625,000 615,355 Other long-term liabilities 9,443 14,299 Total liabilities 634,443 629,654 Preferred stock, par value $1.00, non-voting, 3 shares authorized, no shares issued or outstanding -- -- Common stock, par value $0.01, 75,000 shares authorized, 26,850 and 26,834 shares issued and outstanding, respectively 268 268 Class B common stock, par value $0.01, non-voting, 3,000 shares authorized, 1,250 shares issued and outstanding 13 13 Additional paid-in capital 267,060 266,590 Accumulated deficit (361,701) (337,500) Accumulated other comprehensive income (4,338) (4,338) Stockholders' deficit (98,698) (74,967) Commitments and contingencies -- -- Total liabilities and stockholders' deficit $535,745 $554,687 The accompanying notes are an integral part of this statement. Stage Stores, Inc. Consolidated Condensed Statement of Operations (in thousands, except per share amounts) (unaudited) Thirteen Weeks Ended April 29, 2000 May 1, 1999 Net sales $230,352 $262,591 Cost of sales and related buying, occupancy and distribution expenses 172,034 192,232 Gross profit 58,318 70,359 Selling, general and administrative expenses 54,021 61,219 Store opening and closure program costs 15,045 749 Operating income (loss) (10,748) 8,391 Interest, net 13,428 12,111 Loss before income tax and cumulative effect of a change in accounting principle (24,176) (3,720) Income tax expense (benefit) 25 (1,451) Loss before cumulative effect of a change in accounting principle (24,201) (2,269) Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities -- (2,402) Net loss $(24,201) $(4,671) Basic earnings (loss) per common share data: Basic earnings (loss) per common share before cumulative effect of a change in accounting principle $(0.86) $(0.08) Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities -- (0.09) Basic earnings (loss) per common share $(0.86) $(0.17) Basic weighted average common shares outstanding 28,093 27,987 Diluted earnings (loss) per common share data: Diluted earnings (loss) per common share before cumulative effect of a change in accounting principle $(0.86) $(0.08) Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities -- (0.09) Diluted earnings (loss) per common share $(0.86) $(0.17) Diluted weighted average common shares outstanding 28,093 27,987 The accompanying notes are an integral part of this statement. Stage Stores, Inc. Consolidated Condensed Statement of Cash Flows (in thousands) (unaudited) Thirteen Weeks Ended April 29, 2000 May 1, 1999 Cash flows from operating activities: Net loss $(24,201) $(4,671) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 15,828 8,620 Deferred income taxes -- (208) Accretion of discount 323 285 Amortization of debt issue costs 1,889 759 Cumulative effect of a change in accounting principle -- 2,402 Change in working capital 19,902 (11,575) Total adjustments 37,942 283 Net cash provided by (used in) operating activities 13,741 (4,388) Cash flows from investing activities: Additions to property, equipment and leasehold improvements (807) (7,526) Net cash used in investing activities (807) (7,526) Cash flows from financing activities: Proceeds from (payments on) working capital facility (10,000) 7,650 Proceeds from issuance of common stock -- 221 Payments on long-term debt (185) (164) Additions to debt issue costs (1,864) -- Net cash provided by (used in) financing activities (12,049) 7,707 Net increase (decrease) in cash and cash equivalents 885 (4,207) Cash and cash equivalents: Beginning of period 20,179 12,832 End of period $21,064 $8,625 Supplemental disclosure of cash flow information: Interest paid $5,455 $3,205 Income taxes paid (refunded) $(106) $ 2 The accompanying notes are an integral part of this statement. Stage Stores, Inc. Consolidated Statement of Stockholders' Equity For the Thirteen Weeks Ended April 29, 2000 (in thousands) Shares Outstanding Shares of common stock issued: Beginning balance 26,834 Issuance of stock 16 Ending balance 26,850 Shares of Class B stock issued: Beginning balance 1,250 Ending balance 1,250 Stockholders' Equity Common stock issued: Beginning balance $268 Issuance of stock -- Ending balance 268 Class B stock issued: Beginning balance 13 Ending balance 13 Additional Paid-in Capital: Beginning balance 266,590 Issuance of stock 470 Ending balance 267,060 Accumulated deficit and accumulated other comprehensive income: Beginning balance (341,838) Comprehensive loss: Net loss (24,201) Other comprehensive loss -- Total comprehensive loss (24,201) Ending balance (366,039) Total Stockholders' Deficit $(98,698) Accumulated other comprehensive loss: Beginning balance $(4,338) Ending balance $(4,338) The accompanying notes are an integral part of this statement. Stage Stores, Inc. Notes to Unaudited Consolidated Condensed Financial Statements 1. The accompanying Unaudited Consolidated Condensed Financial Statements of Stage Stores, Inc. ("Stage Stores") have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Those adjustments, which include only normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods, have been made. The results of operations for such interim periods are not necessarily indicative of the results of operations for a full year. The Unaudited Consolidated Condensed Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto for the year ended January 29, 2000 filed with Stage Stores' Annual Report on Form 10-K. The fiscal years discussed herein end on the Saturday nearest to January 31 in the following calendar year. For example, references to "2000" mean the fiscal year ending February 3, 2001. 2. Stage Stores conducts its business primarily through its wholly-owned subsidiary Specialty Retailers, Inc. ("SRI") which, as of April 29, 2000, operated 647 family apparel stores in 33 states located throughout the United States. Stage Stores and SRI are collectively referred to herein as the "Company". 3. On June 1, 2000, Stage Stores, SRI and Specialty Retailer, Inc. (NV) filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Southern District of Texas (the "Court"). Under Chapter 11, the Company is operating its business as debtor-in-possession (see Note 2 to the Company's Consolidated Financial Statements filed with Stage Stores' Annual Report on Form 10-K for the year ended January 29, 2000). The accompanying Unaudited Consolidated Condensed Financial Statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing, such realization of assets and liquidation of liabilities is subject to uncertainty. Further, a plan of reorganization could materially change the amounts reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of a plan of reorganization. The ability of the Company to continue as a going concern is dependent upon, among other things, confirmation of a plan of reorganization, future profitable operations, the ability to comply with debtor-in-possession agreements and the ability to generate sufficient cash from operations and financing sources to meet obligations. Additionally, the accompanying Unaudited Consolidated Condensed Financial Statements do not include any adjustments that would be required if the Company were in liquidation. Substantially all of the Company's pre-petition liabilities are subject to compromise under reorganization proceedings. Prior to the Company's filing for protection under Chapter 11, the Company's debt to banks and bondholders was in default of certain of the terms of the applicable loan agreements, notes and debentures. For financial reporting purposes, those liabilities and obligations have been classified as current liabilities in the accompanying consolidated financial statements. The ultimate adequacy of security for any secured debt obligations and settlement of all liabilities and obligations cannot be determined until a plan of reorganization is confirmed. On June 2, 2000, the Company entered into a three year $450.0 million debtor-in-possession financing agreement (the "DIP Financing") with a lender to finance, among other things, the Company's working capital requirements during Chapter 11 reorganization proceedings. On June 26, 2000, the Company was given full and final approval for the DIP Financing agreement by the U.S. Bankruptcy Court for the Southern District of Texas. Borrowings under the DIP Financing are limited to the availability under a borrowing base which includes eligible inventory and accounts receivable and certain leasehold interest. Borrowings under the DIP Financing agreement are payable upon maturity and the daily interest rates are based upon a Base rate or Eurodollar rate plus an applicable margin based on availability as set forth in the DIP Financing agreement. Initial borrowings under the DIP Financing were used to terminate the Company's existing Accounts Receivable Program and retire the Senior Revolving Credit Facility (defined herein) and for certain closing costs associated with the DIP Financing. As a result of the termination of the Company's existing Accounts Receivable Program, accounts receivable generated under the Company's private label credit card program will no longer be transferred to the Trust but rather will be owned by SRI. Such receivables, along with substantially all of the Company's other assets, serve as collateral for the DIP Financing. On June 7, 2000, the Company paid the Trust $288.1 million and as a result of this payment, all certificates in the Trust were cancelled and the existing accounts receivable of $324.3 million was transferred to SRI. Accordingly, the Company no longer holds a retained interest in the Trust. Prior to the retirement of the Trust, the Company accounted for its retained interest in the Trust as an investment in debt securities classified as trading securities under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt Equity Securities" ("SFAS 115"). As such, the retained interest was recorded at its estimated fair value. In conjunction with the retirement of the existing Accounts Receivable Program, the Company will no longer account for its receivables financing under SFAS 115. The DIP Financing contains covenants which, among other things, restrict the (i) incurrence of additional debt, (ii) incurrence of capital lease obligations, (iii) aggregate amount of capital expenditures and (iv) transactions with related parties. In addition, the DIP Financing requires the Company to maintain compliance with a certain specified level of earnings before depreciation, interest, taxes and special charges. On July 18, 2000, the U.S. Bankruptcy Court for the Southern District of Texas approved the Company's plan to close 120 underperforming stores as part of its restructuring process. The Company has engaged third parties to manage the inventory liquidation process in these stores. As a result of this announced store closure plan, the Company has reflected a $15.0 million charge in the first quarter to write off the fixed assets and prepaid supplies associated with these 120 stores. The charge is reflected in store opening and closure program costs in the accompanying income statement. The Company estimates this store closure plan will be completed within the current fiscal year. 4. During the quarter ended April 29, 2000, the Company charged $0.5 million against the store closure accrual it established in 1999 resulting in a remaining balance of $7.3 million. 5. The Company has provided a valuation allowance against the net deferred tax assets generated during the quarter ended April 29, 2000. See Note 11 to the Audited Consolidated Financial Statements for the year ended January 29, 2000, included in Stage Stores Annual Report on Form 10-K. 6. The following Unaudited Consolidating Condensed Financial Statements for Stage Stores and its wholly-owned subsidiaries is presented to satisfy disclosure requirements pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934 with respect to wholly-owned subsidiaries of Stage Stores. Stage Stores does not prepare separate financial statements and related disclosures for its wholly-owned subsidiaries SRI and Specialty Retailers, Inc. (NV), a wholly-owned subsidiary of Stage Stores which was incorporated during June 1997, because management has determined that such information is not material to investors. SRI is the primary obligor under the 8.5% Senior Notes due 2005 and the 9% Senior Subordinated Notes due 2007 (see Note 6 to the Company's Consolidated Financial Statements filed with Stage Stores' Annual Report on Form 10-K for the year ended January 29, 2000). Stage Stores and Specialty Retailers, Inc. (NV) are guarantors of such indebtedness. The Consolidating Condensed Financial Statements for Stage Stores and its wholly-owned subsidiaries, including all significant intercompany transactions eliminated in consolidation, are presented below. The results of operations of SRPC as reported are not indicative of the total operating performance of the Company's Accounts Receivable Program. Consolidating Condensed Balance Sheet April 29, 2000 (in thousands, unaudited) Specialty SRI SRI SRI Retailers, Inc. Receivables Eliminations Consolidated Purchase Co. ASSETS Cash and cash equivalents $19,064 $ -- $ -- $19,064 Undivided interest in accounts receivable trust (10,808) 46,335 -- 35,527 Merchandise inventories, net 261,332 -- -- 261,332 Prepaid expenses and other current assets 26,739 10,653 -- 37,392 Total current assets 296,327 56,988 -- 353,315 Property, equipment and leasehold improvements, net 163,687 -- -- 163,687 Other assets 13,260 2,371 -- 15,631 Investment in subsidiaries 36,893 -- (36,893) -- Total assets $510,167 $59,359 $(36,893) $532,633 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $63,963 $ -- $ -- $63,963 Accrued expenses and other current liabilities 65,744 2,770 -- 68,514 Current portion of long-term debt 4,841 -- -- 4,841 Long-term debt classified as current 487,520 -- -- 487,520 Total current liabilities 622,068 2,770 -- 624,838 Intercompany notes/advances 172,785 19,696 -- 192,481 Other long-term liabilities 9,443 -- -- 9,443 Investment in subsidiaries -- -- -- -- Total liabilities 804,296 22,466 -- 826,762 Preferred stock -- -- -- -- Common stock -- -- -- -- Class B common stock -- -- -- -- Additional paid-in capital 3,317 34,111 (34,111) 3,317 Accumulated earnings (deficit) (293,108) 2,782 (2,782) (293,108) Accumulated other comprehensive income (4,338) -- -- (4,338) Stockholders' equity (294,129) 36,893 (36,893) (294,129) Total liabilities and stockholders' equity $510,167 $59,359 $(36,893) $532,633 Consolidating Condensed Balance Sheet April 29, 2000 (in thousands, unaudited) Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated ASSETS Cash and cash equivalents $ 2 $1,998 $ -- $21,064 Undivided interest in accounts receivable trust -- -- -- 35,527 Merchandise inventories, net -- -- -- 261,332 Prepaid expenses and other current assets -- -- -- 37,392 Total current assets 2 1,998 -- 355,315 Property, equipment and leasehold improvements, net -- 1,052 -- 164,739 Other assets -- 60 -- 15,691 Investment in subsidiaries -- -- -- -- Total assets $ 2 $3,110 $ -- $535,745 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ -- $ -- $ -- $63,963 Accrued expenses and other current liabilities 11 151 -- 68,676 Current portion of long-term debt -- -- -- 4,841 Long-term debt classified as current -- -- -- 487,520 Total current liabilities 11 151 -- 625,000 Intercompany notes/advances (530) (191,951) -- -- Other long-term liabilities -- -- -- 9,443 Investment in subsidiaries 99,219 -- (99,219) -- Total liabilities 99,700 (191,800) (99,219) 634,443 Preferred stock -- -- -- -- Common stock 268 -- -- 268 Class B common stock 13 -- -- 13 Additional paid-in capital 267,060 160,915 (164,232) 267,060 Accumulated earnings (deficit) (361,701) 33,995 259,113 (361,701) Accumulated other comprehensive income (4,338) -- 4,338 (4,338) Stockholders' equity (98,698) 194,910 99,219 (98,698) Total liabilities and stockholders' equity $ 2 $3,110 $ -- $535,745 Consolidating Condensed Balance Sheet January 29, 2000 (in thousands) SRI Specialty Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated ASSETS Cash and cash equivalents $18,077 $ -- $ -- $18,077 Undivided interest in accounts receivable trust (13,101) 54,701 -- 41,600 Merchandise inventories, net 261,104 -- -- 261,104 Prepaid expenses 7,725 220 -- 7,945 Other current assets 17,755 8,491 -- 26,246 Total current assets 291,560 63,412 -- 354,972 Property, equipment and leasehold improvements, net 180,761 -- -- 180,761 Other assets 13,111 2,608 -- 15,719 Investment in subsidiaries 36,690 -- (36,690) -- Total assets $522,122 $66,020 $(36,690) $551,452 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $40,955 $ -- $ -- $40,955 Accrued expenses and other current liabilities 69,385 2,770 -- 72,155 Current portion of long-term debt 9,830 -- -- 9,830 Long-term debt classified as current 492,393 -- -- 492,393 Total current liabilities 612,563 2,770 -- 615,333 Long-term debt -- -- -- -- Other long-term liabilities 14,299 -- -- 14,299 Intercompany notes/advances 160,719 26,560 -- 187,279 Investment in subsidiaries -- -- -- -- Total liabilities 787,581 29,330 -- 816,911 Preferred stock -- -- -- -- Common stock -- -- -- -- Class B common stock -- -- -- -- Additional paid-in capital 3,317 33,908 (33,908) 3,317 Accumulated earnings (deficit) (264,438) 2,782 (2,782) (264,438) Accumulated other comprehensive income (4,338) -- -- (4,338) Stockholders' equity (deficit) (265,459) 36,690 (36,690) (265,459) Total liabilities and stockholders' equity (deficit) $522,122 $66,020 $(36,690) $551,452 Consolidating Condensed Balance Sheet January 29, 2000 (in thousands) Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated ASSETS Cash and cash equivalents $102 $2,000 $ -- $20,179 Undivided interest in accounts receivable trust -- -- -- 41,600 Merchandise inventories, net -- -- -- 261,104 Prepaid expenses -- -- -- 7,945 Other current assets -- -- -- 26,246 Total current assets 102 2,000 -- 357,074 Property, equipment and leasehold improvements, net -- 1,073 -- 181,834 Other assets -- 60 -- 15,779 Investment in subsidiaries -- -- -- -- Total assets $102 $3,133 $ -- $554,687 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $ -- $ -- $ -- $40,955 Accrued expenses and other current liabilities 22 -- -- 72,177 Current portion of long-term debt -- -- -- 9,830 Long-term debt classified as current -- -- -- 492,393 Total current liabilities 22 -- -- 615,355 Long-term debt -- -- -- -- Other long-term liabilities -- -- -- 14,299 Intercompany notes/advances 18 (187,297) -- -- Investment in subsidiaries 75,029 -- (75,029) -- Total liabilities 75,069 (187,297) (75,029) 629,654 Preferred stock -- -- -- -- Common stock 268 -- -- 268 Class B common stock 13 -- -- 13 Additional paid-in capital 266,590 160,915 (164,232) 266,590 Accumulated earnings (deficit) (337,500) 29,515 234,923 (337,500) Accumulated other comprehensive income (4,338) -- 4,338 (4,338) Stockholders' equity (deficit) (74,967) 190,430 75,029 (74,967) Total liabilities and stockholders' equity (deficit) $102 $3,133 $ -- $554,687 Consolidating Condensed Statement of Operations Thirteen Weeks Ended April 29, 2000 (in thousands, unaudited) SRI Specialty Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated Net sales $230,352 $ -- $ -- $230,352 Cost of sales and related buying, occupancy and distribution expenses 172,034 -- -- 172,034 Gross profit 58,318 -- -- 58,318 Selling, general and administrative expenses 54,488 (171) -- 54,317 Store opening and closure program costs 15,045 -- -- 15,045 Operating income (loss) (11,215) 171 -- (11,044) Interest expense, net 17,581 171 -- 17,752 Income (loss) before income taxes (28,796) -- -- (28,796) Income tax expense (benefit) (126) -- -- (126) Income (loss) before equity in net earnings of subsidiaries (28,670) -- -- (28,670) Equity in net earnings of subsidiaries -- -- -- -- Net income (loss) $(28,670) $ -- $ -- $(28,670) Consolidating Condensed Statement of Operations Thirteen Weeks Ended April 29, 2000 (in thousands, unaudited) Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated Net sales $ -- $ -- $ -- $230,352 Cost of sales and related buying, occupancy and distribution expenses -- -- -- 172,034 Gross profit -- -- -- 58,318 Selling, general and administrative expenses 11 (307) -- 54,021 Store opening and closure program costs -- -- -- 15,045 Operating income (loss) (11) 307 -- (10,748) Interest expense, net -- (4,324) -- 13,428 Income (loss) before income taxes (11) 4,631 -- (24,176) Income tax expense (benefit) -- 151 -- 25 Income (loss) before equity in net earnings of subsidiaries (11) 4,480 -- (24,201) Equity in net earnings of subsidiaries (24,190) -- 24,190 -- subsidiaries Net income (loss) $(24,201) $4,480 $24,190 $(24,201) Consolidating Condensed Statement of Operations Thirteen Weeks Ended May 1, 1999 (in thousands, unaudited) SRI Specialty Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated Net sales $262,591 $ -- $ -- $262,591 Cost of sales and related buying, occupancy and distribution expenses 192,232 -- -- 192,232 Gross profit 70,359 -- -- 70,359 Selling, general and administrative expenses 62,784 (1,675) -- 61,109 Store opening and closure program costs 749 -- -- 749 Operating income (loss) 6,826 1,675 -- 8,501 Interest expense, net 15,088 1,051 -- 16,139 Income (loss) before income taxes (8,262) 624 -- (7,638) Income tax expense (benefit) (3,065) 231 -- (2,834) Income (loss) before equity in net earnings of subsidiaries and cumulative effect of a change in accounting principle (5,197) 393 -- (4,804) Equity in net earnings of subsidiaries (813) -- 813 -- Income (loss) before cumulative effect of a change in accounting principle (6,010) 393 813 (4,804) Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities (1,196) (1,206) -- (2,402) Net income (loss) $(7,206) $(813) $813 $(7,206) Consolidating Condensed Statement of Operations Thirteen Weeks Ended May 1, 1999 (in thousands, unaudited) Specialty Stage Retailers, Stage Stores Stores Inc. Inc. (NV) Eliminations Consolidated Net sales $ -- $ -- $ -- $262,591 Cost of sales and related buying, occupancy and distribution expenses -- -- -- 192,232 Gross profit -- -- -- 70,359 Selling, general and administrative expenses 34 76 -- 61,219 Store opening and closure program costs -- -- -- 749 Operating income (loss) (34) (76) -- 8,391 Interest expense, net -- (4,028) -- 12,111 Income (loss) before income taxes (34) 3,952 -- (3,720) Income tax expense (benefit) -- 1,383 -- (1,451) Income (loss) before equity in net earnings of subsidiaries and cumulative effect of a change in accounting principle (34) 2,569 -- (2,269) Equity in net earnings of subsidiaries (4,637) -- 4,637 -- Income (loss) before cumulative effect of a change in accounting principle (4,671) 2,569 4,637 (2,269) Cumulative effect of a change in accounting principle, net of tax - reporting costs of start-up activities -- -- -- (2,402) Net income (loss) $(4,671) $2,569 $ 4,637 $(4,671) Consolidating Condensed Statement of Cash Flows Thirteen Weeks Ended April 29, 2000 (in thousands, unaudited) SRI Specialty Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated Cash flows from operating activities: Net cash used in operating activities $20,303 $(6,460) $ -- $13,843 Cash flows from investing activities: Investment in subsidiary -- -- -- -- Additions to property, equipment and leasehold improvements (807) -- -- (807) Proceeds from the sales of accounts receivable, net (6,460) 6,460 -- -- Net cash provided by (used in) investing activities (7,267) 6,460 -- (807) Cash flows from financing activities: Proceeds from working capital facility (10,000) -- -- (10,000) Proceeds from issuance of common stock -- -- -- -- Payments on long-term debt (185) -- -- (185) Additions to debt issue costs (1,864) -- -- (1,864) Net cash provided by (used in) Financing activities (12,049) -- -- (12,049) Net increase (decrease) in cash and cash equivalents 987 -- -- 987 Cash and cash equivalents: Beginning of period 18,077 -- -- 18,077 End of period $19,064 -- -- $19,064 Consolidating Condensed Statement of Cash Flows Thirteen Weeks Ended April 29, 2000 (in thousands, unaudited) Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated Cash flows from operating activities: Net cash used in operating activities $(100) $ (2) $ -- $13,741 Cash flows from investing activities: Investment in subsidiary -- -- -- -- Additions to property, equipment and leasehold improvements -- -- -- (807) Proceeds from the sales of accounts receivable, net -- -- -- -- Net cash provided by (used in) investing activities -- -- -- (807) Cash flows from financing activities: Proceeds from working capital facility -- -- -- (10,000) Proceeds from issuance of common stock -- -- -- -- Payments on long-term debt -- -- -- (185) Additions to debt issue costs -- -- -- (1,864) Net cash provided by (used in) Financing activities -- -- -- (12,049) Net increase (decrease) in cash and cash equivalents (100) (2) -- 885 Cash and cash equivalents: Beginning of period 102 2,000 -- 20,179 End of period $ 2 $1,998 -- $21,064 Consolidating Condensed Statement of Cash Flows Thirteen Weeks Ended May 1, 1999 (in thousands, unaudited) SRI Specialty Receivables SRI SRI Retailers, Inc. Purchase Co. Eliminations Consolidated Cash flows from operating activities: Net cash used in operating activities $ 89 $(4,256) $ -- $(4,167) Cash flows from investing activities: Investment in subsidiary -- -- -- -- Additions to property, equipment and leasehold improvements (7,526) -- -- (7,526) Proceeds from the sales of accounts receivable, net (4,256) 4,256 -- -- Net cash provided by (used in) investing activities (11,782) 4,256 -- (7,526) Cash flows from financing activities: Proceeds from working capital facility 7,650 -- -- 7,650 Proceeds from issuance of common stock -- -- -- -- Proceeds from capital contribution -- -- -- -- Payments on long-term debt (164) -- -- (164) Net cash provided by (used in) financing activities 7,486 -- -- 7,486 Net increase (decrease) in cash and cash equivalents (4,207) -- -- (4,207) Cash and cash equivalents: Beginning of period 10,882 -- -- 10,882 End of period $6,675 $ -- $ -- $6,675 Consolidating Condensed Statement of Cash Flows Thirteen Weeks Ended May 1, 1999 (in thousands, unaudited) Specialty Stage Retailers, Stage Stores Stores, Inc. Inc. (NV) Eliminations Consolidated Cash flows from operating activities: Net cash used in operating activities $(103) $(118) $ -- $(4,388) Cash flows from investing activities: Investment in subsidiary (118) -- 118 -- Additions to property, equipment and leasehold improvements -- -- -- (7,526) Proceeds from the sales of accounts receivable, net -- -- -- -- Net cash provided by (used in) investing activities (118) -- 118 (7,526) Cash flows from financing activities: Proceeds from working capital facility -- -- -- 7,650 Proceeds from issuance of common stock 221 -- -- 221 Proceeds from capital contribution -- 118 (118) -- Payments on long-term debt -- -- -- (164) Net cash provided by (used in) financing activities 221 118 (118) 7,707 Net increase (decrease) in cash and cash equivalents -- -- -- (4,207) Cash and cash equivalents: Beginning of period 2 1,948 -- 12,832 End of period $ 2 $1,948 $ -- $8,625 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 Certain items discussed or incorporated by reference herein contain forward-looking statements that involve risks and uncertainties including, but not limited to, the ability to obtain financing on terms reasonably satisfactory to the Company, the ability of the Company to obtain normal trade terms from its vendors, the ability of the Company to comply with the various covenant requirements contained in the Company's DIP Financing and the demand for apparel. The demand for apparel can be affected by weather patterns, levels of competition, competitors' marketing strategies, changes in fashion trends, availability of product on normal payment terms and the failure to achieve the expected results of the Company's merchandising and marketing plans as well as its store opening and closing plans. The occurrence of the above has had and can continue to have a material and adverse impact on the Company's operating results. See "Risk Factors" below. Certain information herein contains estimates which represent management's best judgment as of the date hereof based on information currently available; however, the Company does not intend to update this information to reflect developments or information obtained after the date hereof and disclaims any legal obligation to the contrary. General Overview. The Company operates family apparel stores offering moderately priced, nationally recognized brand name apparel, accessories, cosmetics and footwear in approximately 500 small towns and communities throughout the United States. The Company has recognized the high level of brand awareness and demand for fashionable, quality apparel by consumers in small markets and has identified these markets as a strategically important and under served niche. The Company has developed a franchise focused on small markets offering a broad range of brand name merchandise with a high level of customer service in convenient locations. Significant Event . On June 1, 2000, Stage Stores, SRI and Specialty Retailers, Inc. (NV) filed for protection under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Southern District of Texas (the "Court"). Under Chapter 11, the Company will operate its business as debtor-in-possession. Additionally, a creditor committee has been formed and will have the right to review and object to any non-ordinary course of business transactions and participate in the formulation of any plan or plans of reorganization. As of the petition date, actions to collect pre-petition indebtedness are stayed and other contractual obligations may not be enforced against the Company. In addition, the Company may reject executory contracts and lease obligations, and parties affected by these rejections may file claims with the Bankruptcy Court in accordance with the reorganization process. Substantially all liabilities as of the petition date are subject to settlement under a plan of reorganization to be voted upon by all impaired classes of creditors and equity security holders and approved by the Bankruptcy Court. Substantially all of the Company's liabilities are subject to compromise under reorganization proceedings. The Company's debt to banks and bondholders is in default of the terms of the applicable loan agreements, notes and debentures. For financial reporting purposes, those liabilities and obligations have been classified as current liabilities. The ultimate adequacy of security for any secured debt obligations and settlement of all liabilities and obligations cannot be determined until a plan of reorganization is confirmed. On June 2, 2000, the Company entered into the three year $450.0 million DIP Financing with a lender to finance, among other things, the Company's working capital requirements during Chapter 11 reorganization proceedings. On June 26, 2000, the Company was given full and final approval for the DIP Financing agreement by the U.S. Bankruptcy Court for the Southern District of Texas. Borrowings under the DIP Financing are limited to the availability under a borrowing base which includes eligible inventory and accounts receivable and certain leasehold interest. Initial borrowings under the DIP Financing were used to retire the Company's existing Accounts Receivable Program and the Senior Revolving Credit Facility and for certain closing costs associated with the DIP Financing. As a result of the retirement of the Company's existing Accounts Receivable Program, accounts receivable generated under the Company's private label credit card program will no longer be transferred to the Trust but rather will be owned by SRI. Such receivables, along with substantially all of the Company's other assets, serve as collateral for the DIP Financing. On July 18, 2000, the U.S. Bankruptcy Court for the Southern District of Texas approved the Company's plan to close 120 underperforming stores as part of its restructuring process. The Company has engaged third parties to manage the liquidation process in these stores. As a result of this announced store closure plan, the Company reflected a $15.0 million charge in the first quarter to write off the fixed assets and prepaid supplies associated with these 120 stores. The charge is reflected in store opening and closure program costs in the accompanying income statement. The financial information, discussion and analysis that follow should be read in conjunction with the Company's Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 29, 2000. Results of Operations Thirteen Weeks Ended April 29, 2000 Compared to Thirteen Weeks Ended May 1, 1999 Sales for the thirteen weeks ended April 29, 2000 ("current year first quarter") decreased 12.2% to $230.4 million from $262.6 million for the thirteen weeks ended May 1, 1999 ("prior year first quarter"). The decrease in sales for the current year first quarter reflects, among other things, (i) the net reduction of 41 stores since the end of the prior year first quarter, (ii) the impact of liquidation sales related to the Company's 2000 store closure program and (iii) a 10.6% decline in comparable store sales. Management believes the majority of the decline in comparable store sales was attributable to the impact of lower inventory levels throughout the current year first quarter as a result of a contraction in trade support from the Company's vendors and factors. The contraction in trade support caused a significant disruption in the Company's spring merchandise receipt flows. Gross profit decreased 17.2% to $58.3 million for the current year first quarter from $70.4 million for the prior year first quarter. Gross profit, as a percent of sales, decreased to 25.3% for the current year first quarter from 26.8% for the prior year first quarter. The lower gross profit percentage for the current year first quarter reflects, among other things, (i) the impact of the increased level of promotional and liquidation activity utilized during the quarter, (ii) the negative sales leverage associated with the Company's fixed buying, occupancy and distribution expenses which are included in cost of goods sold and (iii) lower vendor discounts as a result of reduced inventory purchases. Selling, general and administrative ("SG&A") expenses for the current year first quarter decreased 11.8% to $54.0 million from $61.2 million in the prior year first quarter and, as a percent of sales, increased to 23.5% from 23.3% in the comparable period last year. SG&A expenses for the current year first quarter benefited from, among other things, (i) the net year-over- year reduction of 41stores, and (ii) the Company's continuing efforts in controlling SG&A expenses. SG&A expenses for the current year first quarter includes $2.0 million of operating costs at stores which are in the process of being closed. Store opening and closure program costs of $0.8 million for the prior year first quarter reflect costs associated with the opening of 10 new stores during the period, while the current year first quarter reflects the costs associated with one new store opening. Store opening and closure program costs for the current quarter also includes $15.0 million write-off of fixed assets and prepaid supplies associated with the 120 stores in the store closure program discussed above. As a result of the factors discussed above, operating income for the current year first quarter decreased to a loss of $10.7 million from $8.4 million of income for the prior year first quarter. Net interest expense for the current year first quarter increased 10.7% to $13.4 million from $12.1 million for the prior year first quarter due to a higher level of average borrowings outstanding and an increase in overall borrowing rates. As a result of the foregoing, the Company's net loss for the current year first quarter was $24.2 million as compared to a net loss for the prior year first quarter of $2.3 million before the cumulative effect of change in accounting. In connection with the adoption of SOP 98-5, the Company recorded the cumulative effect of change in accounting principle, net of tax, of $2.4 million during the prior year first quarter. The charge reflects the write-off of the unamortized organizational costs associated with the Company's accounts receivable trust and credit card bank. Seasonality and Inflation The Company's business is seasonal and annual results of operations are highly dependent upon the fourth quarter as quarterly sales and profits are traditionally lower during the first three quarters (February through October) and higher during the fourth quarter (November through January). In addition, working capital requirements fluctuate throughout the year, increasing substantially in October and November due to requirements for significantly higher inventory levels in anticipation of the holiday season. The following table shows certain unaudited financial information for the Company by quarter (dollars in thousands): 2000 1999 Q1 Q1 Q2 Q3 Q4 Net sales $230,352 $262,591 $269,848 $264,327 $324,801 Gross profit 58,318 70,359 74,021 77,203 2,867 Operating income (loss) (10,748) 8,391 (8,332) 12,560 (220,971) Quarters' operating income as a percent of total -- N/A N/A N/A N/A Income (loss) before cumulative effect of a change in accounting principle $(24,201) $(2,269) $(15,091) $ 224 $(260,067) Net income (loss) $(24,204) $(4,671) $(15,091) $ 224 $(262,352) The Company does not believe that inflation had a material effect on its results of operations during the past two years. However, there can be no assurance that the Company's business will not be affected by inflation in the future. Liquidity and Capital Resources Total working capital decreased $11.4 million to a deficit of $269.7 million at April 29, 2000 from a deficit of $258.3 million at January 29, 2000. During the quarter, merchandise inventories decreased $18.2 million as a result of the disruption in the flow of merchandise during the period. As discussed above, as a result of the Company's poor financial performance, lack of adequate trade support to fund its inventory working capital requirements, lack of sufficient financial flexibility and liquidity and violations under certain covenants under its various debt agreements, the Company filed for protection under Chapter 11 in the United States Bankruptcy Court for the Southern District of Texas on June 1, 2000. On June 2, 2000, the Company entered into a three year $450.0 million DIP Financing with a lender to finance, among other things, the Company's working capital requirements during Chapter 11 reorganization proceedings. On June 26, 2000, the Company was given full and final approval for the DIP Financing by the U.S. Bankruptcy Court for the Southern District of Texas. Borrowings under the DIP Financing are limited to the availability under a borrowing base which includes eligible inventory and accounts receivable and certain leasehold interest. Borrowings under the DIP Financing agreement are payable upon maturity and the daily interest rates are based upon a Base rate or Eurodollar rate plus an applicable margin based on availability which is included on the grid contained in the DIP Financing agreement. Initial borrowings under the DIP Financing were used to retire the Company's existing Accounts Receivable Program and Senior Revolving Credit Facility (defined herein) and for certain closing costs associated with the DIP Financing. As a result of the retirement of the Company's existing Accounts Receivable Program, accounts receivable generated under the Company's private label credit card program will no longer be transferred to the Trust but rather will be owned by Specialty Retailers, Inc. Such receivables, along with substantially all of the Company's other assets, serve as collateral for the DIP Financing. The DIP Financing contains covenants which, among other things, restrict the (i) incurrence of additional debt, (ii) incurrence of capital lease obligations, (iii) aggregate amount of capital expenditures and (iv) transactions with related parties. In addition, the DIP Financing requires the Company to maintain compliance with a certain specified level of earnings before depreciation, interest, taxes and special charges. The Company's primary capital requirements are for working capital, debt service under the DIP Financing, professional fees during the reorganization process and capital expenditures. Management believes cash interest payments under the DIP Financing will be approximately $21.0 million for the remainder of 2000. Capital expenditures for 2000 are expected to be $10.0 million primarily reflecting maintenance expenditures at the Company's stores and infrastructure investment. Management believes that there should be sufficient liquidity under the DIP Financing to fund the Company's working capital requirements during the reorganization proceedings. PART II - OTHER INFORMATION Item 1. Legal Proceedings From time to time the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of its business. Due to the bankruptcy filing mentioned previously, much of the litigation mentioned below is subject to provisions of an automatic stay against further proceedings. Under an automatic stay, the bankruptcy court must approve of the proceedings or the action must be specifically exempt by federal statute to continue. On March 30, 1999, a class action lawsuit was filed against the Company and certain of its officers, directors and stockholders in the United States District Court for the Southern District of Texas by John C. Weld, Jr., a stockholder who purchased 125 shares of the Company's common stock on August 3, 1998, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (the "Weld Suit"). The Company believed that the allegations of the Weld Suit are without merit, and on July 23, 1999, the Company filed a motion to dismiss. United States District Judge Kenneth Hoyt entered an order on December 8, 1999 dismissing the Weld Suit. The order has been appealed by Mr. Weld. On March 28, 2000, the Company filed a lawsuit against Carl Tooker, the Company's former Chairman, Chief Executive Officer and President in the District Court of Harris County, Texas. The lawsuit is an action for damages arising from transactions Mr. Tooker engaged in or directed while serving as President, Chief Executive Officer and Chairman of the Board of Directors of the Company which transactions benefited him personally or were otherwise contrary to his duties as an officer and director. (See Form 8-K dated March 9, 2000). The suit also seeks recovery of debt owed by Mr. Tooker to the Company pursuant to loans and promissory notes Mr. Tooker caused the Company to make to him while serving in those capacities, and for conversion of stock collateral pledged to the Company to secure his indebtedness. The Company also seeks a mandatory injunction requiring Mr. Tooker to deposit into the registry of the Court all remaining stock collateral in his possession, and for a declaratory judgment that Mr. Tooker was properly terminated "for cause" under the terms of his employment agreement. The Company seeks to recover not less than an aggregate of $2,755,672, accrued interest, punitive damages, costs and reasonable attorneys' fees. On or about April 27, 2000 Mr. Tooker filed an Answer and Counterclaim against the Company and a Third Part Petition against the Company's Interim President, Chief Executive Officer and Chairman of the Board, John J. Wiesner, Martin Stringer, counsel to the Special Committee, and the law firm of McKinney & Stringer, P.C. The answer generally denies all allegations made by the Company. Mr. Tooker seeks damages from the Company of approximately $3.9 million, plus attorney's fees, interest, and costs for breach of his employment contract, and a like amount, including punitive damages, from the third-party defendants for alleged tortious interference with his employment contract. Mr. Tooker also seeks to impose a constructive trust on the $300,000 in the Company's possession for certain contractual benefits he claims to be due under his employment agreement. The remaining claims seek damages against the Company and in part against the third-party defendants, totaling $18 million, plus punitive damages, fees, interest and costs, on theories of defamation, civil conspiracy, breach of fiduciary duty and breach of duty of good faith and fair dealing. The case is in its initial development, prior to any discovery. The Company and the third- party defendants dispute his allegations and intend to vigorously defend against all of Mr. Tooker's counterclaims. In March 2000, eleven former employees of SRI d/b/a Palais Royal, filed two separate suits in the United States District Court for the Southern District of Texas against the Company, SRI and Mary Elizabeth Pena, arising out of alleged conduct occurring over an unspecified time while the plaintiffs were working at one or more Palais Royal stores in the Houston, Texas area. The plaintiffs allege that on separate occasions they were falsely accused of stealing merchandise and other company property and giving discounts for purchases against company policy. The suits accuse the defendants of defamation, false imprisonment, intentional infliction of mental distress, assault and violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act. The claims seek unspecified damages for mental anguish, lost earnings, exemplary damages, treble damages, interest, attorneys' fees and costs. The Company denies the allegations and intends to vigorously defend against the claims. Management believes that none of the matters in which the Company or its subsidiaries are currently involved, either individually or in the aggregate, is material to the financial position, results of operations or cash flows of the Company or its subsidiaries. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities Substantially all of the Company's liabilities are subject to settlement under reorganization proceedings. The Company's debt to banks and bondholders is in default of the terms of the applicable loan agreements, notes and debentures. For financial reporting purposes, those liabilities and obligations have been classified as current liabilities. The ultimate adequacy of security for any secured debt obligations and settlement of all liabilities and obligations cannot be determined until a plan of reorganization is confirmed. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information On June 6, 2000, the New York Stock Exchange informed the Company that the trading of the Company's stock will be suspended immediately. Following the suspension, application will be made by the New York Stock Exchange to the Securities and Exchange Commission to delist the Company's stock. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27.1 Financial Data Schedule. (b) Reports on Form 8-K The Company filed a News Release on Form 8-K dated February 3, 2000 related to Stage Stores, Inc. announcing an amendment to the credit agreement, discussing the Company's cost reduction program and reporting fourth quarter 1999 sales. The Company filed a copy of the Fifth Amendment Agreement to the Credit Agreement, dated as of February 3, 2000, on Form 8-K dated February 7, 2000. The Company filed a News Release on Form 8-K dated February 23, 2000 related to Stage Stores, Inc. announcing the departure of the Company's President and Chief Executive Officer and a commitment to increase the Company's working capital facility. The Company filed a News Release on Form 8-K dated March 9, 2000 related to Stage Stores, Inc. announcing fourth quarter and full year 1999 results. The Company also provided additional details on the departure of the Company's President and Chief Executive Officer as announced in a News Release on Form 8-K dated February 23, 2000. The Company filed a News Release on Form 8-K dated May 1, 2000 related to Stage Stores Inc. announcing the departure of the Company's Vice Chairman and Chief Financial Officer. The Company filed a News Release on Form 8-K dated June 1, 2000 related to Stage Stores Inc. announcing a major restructuring under Chapter 11 of the United States Bankruptcy Code and commencement of its reorganization proceedings in the United States Bankruptcy Court in Houston, Texas. The Company filed a News Release on Form 8-K dated June 1, 2000 related to Stage Stores Inc. announcing the $450 million debtor-in-possession credit agreement and announcing that on June 6, 2000, the New York Stock Exchange informed the Company that the trading of the Company's stock will be suspended immediately. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STAGE STORES, INC. July 21, 2000 /s/ John J. Wiesner (Date) John J. Wiesner Chairman, Interim Chief Executive Officer and President (principal executive officer) July 21, 2000 /s/ Charles M. Sledge (Date) Charles M. Sledge Senior VP Finance, Treasurer and Corporate Secretary